The world is in the midst of the biggest inflationary episode since the 1970s. The costs of goods and services have gone up across the board, with increases concentrated in the most essential sectors of food, energy and housing.
This price shock has forced down the real purchasing power of working-class people. In Australia, workers have lost a decade’s worth of wage rises in the space of a few months. Meanwhile, politicians, economists and business owners are preparing to punish workers even more. Indifferent to the collapse in living standards that millions are facing, the media are instead focused on the hypothetical danger of real wage rises that are facing…well, nobody.
The pandemic days when essential workers were feted have been relegated to the history books, along with concern for public health and decent welfare payments. We now face escalating assaults on living standards that, if not resisted, could set us back decades.
To understand this situation, we have to look at recent shifts in the global economy.
When the pandemic first swept the world, most economists predicted that it would result in economic catastrophe as lockdowns destroyed industries and impoverished millions of workers. Although economies did collapse in the first half of 2020, governments in the advanced capitalist world quickly stepped in with huge spending designed to prop up the system. Stimulus measures were far more substantial than those deployed in the Global Financial Crisis of 2007–09. For instance, the US government alone had spent more than $5 trillion by November 2021, not including the varied and vast stimulatory actions taken by the Federal Reserve. Broadly speaking, these emergency measures staved off the predicted catastrophe.
Corporations found new ways to make money as governments provided relatively generous support to both consumers and businesses. Economic fortunes revived almost as quickly as they had cratered. The blood of millions of unnecessary pandemic casualties was sacrificed to accelerate this recovery, as governments prematurely abandoned attempts to contain COVID-19.
But the rapid rebound created new problems. There was a huge rise in household savings as workers banked cash usually spent on restaurants and holidays, and, in countries like Australia, as payments increased to the unemployed and to small business owners. As the immediate fear of collapse receded, workers used their increased funds to improve their household amenities, driving a boom in furniture, whitegoods and home renovations.
But lockdowns and labour shortages restricted supply and disrupted supply chains that make world trade possible. Big manufacturers had also scaled down their capacities in the early days of the pandemic, preparing for a long recession. They were unprepared when the economy snapped back, and took months to catch up. While there has been an increase in capital expenditure in recent months, driven in part by onshoring and “friend-shoring” of strategic sectors, there can be long delays between investment and new capacity coming online.
In a classic example of how the free market fails in every crisis, these shortages led to eye-watering price rises. For instance, the cost of international shipping increased dramatically through 2020 and early 2021, by up to 1,250 percent on some lines. In many countries, trucks and drivers were in short supply and waiting times at ports blew out. The global boom in manufacturing, paired with the more localised booms in home renovations in the West, led to dramatic increases in the cost of necessary inputs such as timber, coal, iron ore and steel, which are only starting to ease as we go to print. Companies desperately tried to fill orders and restock their inventories, adding further pressure to supply chains. Being good capitalists, those who paid these higher prices passed on the cost to retailers, who in turn passed them on to workers.
Notably, this all preceded the war in Ukraine, which is often used by Western governments to explain away inflation. Putin’s war and Western sanctions undeniably have placed additional strain on energy and food supplies, especially damaging for states in Europe and the Middle East that rely on Ukrainian and Russian exports. As well, the risk of a wider European war cannot be ruled out, however unlikely. But far from being an outlier, political shocks such as this are an inevitable feature of a world market that is simultaneously unified by trade and fragmented by geopolitical rivalries. In other words, inflation and supply shortages reflect the insanity of a world economy organised around markets and profits rather than human need.
There has been much debate about the cause of inflation. Monetarists insist that it is caused by governmental largesse and cheap credit. Keynesians prefer to blame supply shocks and lack of investment in productive capacity.
Neither of these theories can explain the current crisis. Cheap credit and quantitative easing have been in place since 2008, so why did inflation remain so low until last year? Clearly the shocks generated by lockdowns and opening-ups – involving both supply and demand – are factors. Yet the Keynesian argument, which insists that the problem can be fixed by increasing supply, fails too. The failure to sufficiently invest in new productive capacity for decades is not some accident, or bad policy choice. It reflects that the world already produces far more goods than we need, and certainly far more than can be sold profitably. No amount of subsidies, handouts and cheap credit can convince companies to build unprofitable and unnecessary projects, or to provide the necessary resources to the growing ranks of the global poor.
Central banks have proven uninterested in the nuances of these discussions. With the exception of Japan, central banks across the advanced world have discarded the “easy money” policies in place since the Global Financial Crisis, in favour of old-school monetarism. They hope to rein in inflation by tightening access to credit through raising interest rates and withdrawing support for the bond market, the main source of funds for governments and big corporations.
The immediate impact of this new policy has been to pop a number of asset bubbles. Years of cheap credit led to rampant speculation in cryptocurrencies, unprofitable tech start-ups, stocks more broadly, real estate and other speculative “assets”. Tightening conditions will see them all decline in value, to a greater or lesser extent. A recent newsletter by economist Adam Tooze noted that the sell-off in equities and bonds, since the peak in late 2021, has resulted in $15.5 trillion in losses, equivalent to about 60 percent of US GDP in 2019.
Meanwhile Australian investors in crypto have already lost around 70 percent of their real money, with more pain to come as the ponzi schemes unravel. Housing will take longer to be impacted, but could fall by 20 percent or more. To some extent these corrections reflect a necessary return to reality: the price/earning ratio of many stocks was off the charts, housing is beyond unaffordable, and crypto is essentially worthless. Soaring stock markets have also drawn increasing amounts of capital, far surpassing investment in the real economy. Disorderly crashes in any of these sectors could bring down the whole house of cards. So even from a capitalist point of view, these bubbles posed a risk to the health of the broader economy, and an orderly correction could prove positive in the long run.
But the risks go well beyond the financial sector. A report by Bloomberg found that roughly one-fifth of America’s top 3,000 firms don’t earn enough profit to cover the interest payments on their debts. Forcing some of these companies to the wall could be the basis for a new round of growth and accumulation, if it doesn’t send the whole economy spiralling downwards.
There is also a global element to this process of cannibalisation. US corporations enjoy a significant advantage in the world markets, given the dominance of their currency and the economic, political and military institutions of their home state. This gives the US ruling class a unique capacity to shape the global economy, defending key industries and interests while passing on higher costs and risks on to weaker competitors.
Many low- and medium-income countries have enormous debts, mostly denominated in US dollars. US economist Michael Spence has described the combination of rising interest rates, higher energy and food prices, and a strengthening US dollar as a “nightmare scenario” that threatens to destabilise these countries. Protests have broken out in Panama, and nuclear-armed Pakistan is at risk of defaulting on its debts. The crisis in Sri Lanka is the most developed, and could be a taste of what is to come elsewhere: terrible suffering for workers and the poor, and new opportunities for the vulture capitalists to penetrate new markets. Even middle-income countries, such as Argentina, Turkey and South Africa are facing political crises underpinned by these economic shocks.
There is more than a little echo of the early 1980s in the policies of the US Federal Reserve today, even if under different conditions. Then, as now, forcing interest rates up was partly motivated by a desire to cull inefficient corporations and strengthen US capital for an imperial power play. This is one element of the competition that is perpetually taking place between capitalists, supported by the institutions of their state.
Having said that, smashing workers’ living standards was the key goal of the ruling class in the 1980s, just as it is today. Neoclassical economic theory says that inflation is largely a product of a vicious circle of wage rises leading to generalised price rises – what it terms a “wage-price spiral”. This supposed problem can be “fixed” by driving up unemployment and reducing working-class purchasing and bargaining power.
US Federal Reserve chief Jay Powell made this point explicitly in a press conference on 4 May, explaining that, by slowing economic growth, the US could “get wages down and then get inflation down”. Australian Reserve Bank head Phillip Lowe has insisted that wages must be cut substantially: “Three-and-a-half [percent annual wage rise] is the anchoring point that I want people to keep in mind. I know it’s difficult when inflation is higher than that”.
What we are currently seeing, however, is not a wage-price spiral, but a profits-profits spiral. Workers are collateral damage in this process, rather than the factor driving it. Inflation has nothing to do with workers being greedy or wages being too high. In research conducted for the American Economic Policy Institute, Josh Bivens found that more than 50 percent of US inflation has been driven by corporations seeking to maintain or expand their profit margins, with wages accounting for just 8 percent.
Yet the capitalist media are campaigning hard to provide ideological cover for this new ruling-class offensive. When the Fair Work Commission handed down a pitiful one dollar an hour increase in the minimum wage, journalists fretted about whether this trivial increase would be passed on to other workers, thus ruining the economy.
So workers are being set up to pay for this crisis through serious attacks on our living standards. Real wages are falling fast, with the Australian newspaper estimating that NSW public servants will lose $7,200 this year due to wage caps. However shocking the data, simplistic inflation-adjusted income comparisons undersell the scale of the coming fall in working-class living standards. For one thing, prices of essential goods and services are rising much more than headline inflation figures indicate. At the same time, rising interest rates and higher unemployment will lead to more pain, as servicing outstanding debts on mortgages and credit cards gets harder and harder. If that weren’t bad enough, governments are now looking to reduce spending on social services and welfare to balance budgets and “reduce demand”.
It is for all these reasons that discussions of an economic crisis and world recession have come to dominate the media. It is hard to say, as we go to print, how soon a recession will arrive or how deep it might be. But all signs point to some sort of contraction, and a sharp drop in world growth. The most visible of these is the data on US GDP, which has fallen for two consecutive quarters, which by some definitions means it is in a technical recession. To some extent this is a statistical quirk generated by its status as the world’s main importer of goods, and it is partially ameliorated by continuing growth in the manufacturing and services sectors in that country. But even in the US, the trend is downwards.
Europe is in a qualitatively worse position, being more reliant on vulnerable energy and food imports. Its inflation rates are now roughly equal to those in the US, while it enters the crisis with substantially higher unemployment. A recent survey of retail spending in Germany in June reported a reduction of 9.8 percent from June 2021, the highest fall since 1980. The cuts were driven largely by reductions in spending on non-essential goods, a sure sign that workers are already feeling the squeeze. Data from the Manufacturing Purchasing Managers’ Index indicates production in Europe is already contracting due to decreased demand and fears of a downturn.
Australia is facing a similar scenario, albeit somewhat delayed. Inflation rates here are lower, and are rising more slowly than elsewhere. This means the fall in living standards, while substantial, has been less drastic than in many other countries. For instance, while the savings rate is falling fast, household savings continued to rise in the first quarter of 2022. Along with low unemployment, and high commodity prices, these are real buffers to an imminent collapse in living standards. This will probably start to change.
One decisive factor that will impact on Australia, and the rest of the world, is the fate of the Chinese economy. China carried much of the world on its shoulders during the GFC, but enters this new economic phase in a much weaker position. Its economy has been hit by repeated lockdowns and a debt crisis driven by failing real estate ponzi schemes. Any substantial slowdown there could drag the Australian economy – and the wider world – down in its wake. Growing tensions between a renewed and expanded NATO and China add to the economic and wider political risks, and that’s before the possibility of a disastrous conflict over Taiwan is factored in.
In this situation, bosses are already preparing for a possible downturn, and their resolve to make workers pay will only intensify as the turmoil continues.
Politics is moving fast to accommodate the new reality. President Biden has had his signature progressive policies delayed and then gutted, the sense of relief initially generated by Trump’s defeat long since replaced by frustration with yet another feeble Democratic administration. A small win on a pared-back reform bill that will hand billions to fossil fuel and automotive giants will not help, notwithstanding histrionic attempts by the liberal press to turn a legislative molehill into a mountain. Buffeted by political paralysis and economic turmoil, Biden is flapping helplessly in the political wind, waiting to be put out of his misery by an insurgent Republican party.
His main successes lie in the realm of foreign policy, where Biden has been able to ground Trump’s anti-China aggression in a strengthened network of imperial alliances. Pelosi’s provocative visit to Taiwan, and China’s dangerous overreaction, illustrate how easy it would be for relatively minor incidents to escalate into all-out war between economic and military superpowers. In the meantime, the decoupling and fragmentation of the world market will make inflation worse.
The combination of high inflation and world recession, and the bitter social sentiments they will generate, will likely throw much of the global south into political turmoil. Latin America is the most hopeful region for left-wing social struggle, and continues to see left-wing mobilisations and important electoral victories against the right. But the heightened mobilisations of that continent reaffirm the urgency of rebuilding a revolutionary left, as victorious centre-left parties have repeatedly failed to enact positive reforms.
In Australia, the dark clouds are gathering. Despite campaigning on wages growth, the Australian Labor Party is now arguing that pay cuts will be necessary and ongoing, right through to 2024. Prime Minister Anthony Albanese and Treasurer Jim Chalmers are also signalling that government spending will be reduced in the October budget update, an austerian attitude foreshadowed in their initial refusal to extend pandemic leave payments. It’s too early for any of this to have blunted their political honeymoon, with government spokespeople largely successful in blaming the previous Liberal government for the various crises. But this excuse will not last, especially as the cost-of-living crisis grows more acute. If unions do not lead actions to defend conditions, dissatisfaction with a right-wing Labor government could provide fuel for the Liberals and the far right.
Repeated strike action by teachers, nurses and railway workers in New South Wales shows that workers will jump at the chance to fight if given a lead. This is reinforced by the popularity of the rail strikes in the UK, which have won widespread support, especially from younger workers who have moved to the left in recent years. A successful mobilisation on 18 June by the Trades Union Congress, the union federation in England and Wales, drew tens of thousands of unionists onto the streets to demonstrate against the cost-of-living crisis. More generally, there is a real uptick in struggle across the UK, as workers fight to defend their living standards.
Objectively, the conditions for an uptick in industrial action by workers here in Australia are just as present. A tight labour market made worse by constant COVID disruptions means workers have more leverage than usual. Rising cost of living means workers will be motivated to fight for more.
Yet aside from NSW, there is no sign of a pulse in the union movement. Indeed, the strikes in NSW reflect that it is the only major state with a Liberal government. Elsewhere, the unions have refused to fight, concerned not to embarrass the state and now federal ALP governments. The experience in the teachers’ union in Victoria is indicative. The Andrews government refused to lift its pay cap above the paltry 1.5 percent figure established years ago and the officials of the AEU caved in immediately, without calling a single industrial action or even mass meeting. Thousands have now left the union in protest, and the pay cap remains in place.
As economic conditions worsen, there will be growing pressure on union leaders and their members to be “reasonable” and to “tighten our belts” for the good of the economy. Already, the ACTU has suggested that it will seek wage agreements lower than the inflation rate, essentially committing to supporting cuts to workers’ wages. Yet there will also be pressure the other way. This was seen in a mass meeting of the NSW nurses’ union, where a motion moved by socialist activists for a 7 percent wage rise received majority support despite bitter opposition from officials who were preparing to settle for 3 percent. Following this meeting, the railway union, also involved in ongoing bargaining, quietly increased its pay claim to 7 percent, an indication of how resistance can spread.
Workers should not agree to sacrifice a single dollar at the altar of corporate profits. The fact that the ALP is committed to maintaining tax cuts for the rich and further expanding the bloated military budget is evidence that the money exists to fund a better society. Workers should instead insist that funds be spent on dramatic improvements to the health and welfare systems and the modernisation of public infrastructure, including public transport and housing. We will also need price controls and public investment in a range of areas to protect workers from inflation, if that proves to be lasting. None of this will be possible unless we build a socialist movement that can stand up to the rich and their representatives in government.
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